Lower-than-expected grain production will raise inflationary risks

- El Nino effect will increase the risk of uncertainty regarding the progress of monsoon and will also increase food prices.

That the central government is assisting the Reserve Bank of India on measures to control inflation. The central government has also hinted that it may use trade policy to control prices and last week the center decided to impose export duty on onion. However, this was not the first step towards controlling prices as the government had recently imposed restrictions on the export of rice and the storage of some other food items such as pulses. Consumer price index-based inflation rose to a 15-month high of 7.44 percent in July and is expected to remain above the central bank's upper-end target range in August. This rate has increased due to the rise in food prices, adding to the risk of uncertainty about the progress of the monsoon due to the El Nino effect.

Various parts of the country have received relatively low rainfall, which may also affect agricultural production. A recent study by Reserve Bank economists has revealed that the southwest monsoon is important not only for Kharif crops but also for Rabi crops. Although the effect of monsoon is also statistically significant for kharif crops, it has decreased in recent years. Improvements in irrigation infrastructure have helped mitigate the severity of adverse conditions due to low rainfall. For example, total production of rice and cereals has increased every year since 2016, despite four years of below-normal rainfall. Although the degree of dependence of food production on the monsoon has decreased, rainfall has a significant impact.

A 21.4 percent deviation in rainfall levels in 2009 resulted in a 12 percent reduction in total food production. It may be noted that the progress of monsoon has been significant but irrigation facilities are not equally available in all states so it is worth preparing for lower food production. Government measures are often not in the best interest of the agricultural sector and potentially hinder adequate supply processes.

A relatively high cost of food production prompts producers to increase production. But if the government repeatedly bans exports to control prices, farmers will also be reluctant to invest extra to increase production. Such measures actually affect India's credibility as a reliable supplier of agricultural products. Its purpose was to control prices in the domestic market with a short-term outlook.

Experts say that in this context, India's policies have been biased in favor of consumers, which affects farmers' income and their earnings. The government should avoid such interference and support the agriculture sector with a long-term approach that will help increase investment and production.

The government's reaction to the high inflation rate of food items is understandable. But that is not always desirable, things are more complicated for the Reserve Bank's Monetary Policy Committee. The committee in its last meeting kept the policy repo rate unchanged and decided to watch it based on the expected increase in inflation mainly due to rising vegetable prices. In such a scenario, monetary policy intervention is unlikely to have the desired effect.

In fact, the common understanding is that such price shocks are temporary and quickly reverse. However, if price pressures persist, policy action may be warranted as this underpins expectations. Monsoon will be important at this stage.